Minority shareholder rights – what are my rights and how do I protect them?

Minority shareholder rights – what are my rights and how do I protect them?

‘I’m a minority shareholder, holding only a small percentage of voting shares in a company. I do not know how the company is performing. What are my rights and what can I do to protect my position?’ 

Minority shareholders are often kept in the dark when it comes to the financial or operational sides of the businesses’ they’ve invested in. It can be difficult for minority shareholders when they feel the company they have invested in is not being transparent and they have no way of knowing how their investment is performing. Minority shareholders may not have secured a board or observer seat and so decisions are made without them. 

Below, we list some key rights and next steps for you to take to protect your position as a minority shareholder. 

Minority shareholder decision rights 

A shareholder, even a minority shareholder, may be able to effect certain steps depending on their level of shareholding. A minority shareholder holding over 25% of voting shares can block special resolutions of the company from passing, and a shareholder holding over 5% of the voting shares in the company can require a written resolution be circulated to all shareholders.  

Director powers 

Directors have broad powers to act under their own discretion so long as they are acting for the benefit of the company and its members as a whole. This may change if there are contractual obligations under a shareholders’ agreement or certain decisions which require shareholder approval under the Companies Act 2006.  

Directors also do not have to keep you informed of all decisions they make, unless it is a specific matter requiring your shareholder consent, whether at law or under the Companies Act 2006. 

Share dilution rights 

Under the Companies Act, all shareholders have a right of first refusal where new shares are to be issued. If this is to be disapplied it must be done via shareholder resolution after approval by the directors. As above, all members are entitled to have shareholder resolutions circulated to them. 

The company’s register of members must be made available to all shareholders, allowing a minority shareholder to inspect and see if further shares have been issued, whether in contravention of the right of pre-emption or otherwise. 

Removing a director 

Shareholders may propose an ordinary resolution to remove a director, though this requires special notice and the director in question is to be given the opportunity to respond. As this requires an ordinary resolution, a minority shareholder may not be able to pass this resolution by themselves, but can certainly bring it to the table for other shareholders to consider, so long as the correct procedure is followed.  

If you want to find out more, we’ve published a useful guide on how to remove a director, covering everything you or others need to know about how to remove a director from a private company in a number of different situations. 

Directors not acting in your best interests 

This can sometimes lead to a ‘chicken and egg’ situation. How does a minority shareholder know if the directors are acting in their interests if they do not have a right to know all the decisions that the directors are making? If there is a possibility that there is a claim – but you do not have the information yet – our director and shareholder disputes team may be able to assist in asking for the relevant information. In the event that such information is not forthcoming, our dispute team may also be able to advise you in bringing a formal claim to determine if your position has been prejudiced. 

What can I do to protect my position as a minority shareholder? 

  1. Request evidence of share ownership  
    Shareholders are entitled to evidence of their share ownership. You should request a share certificate proving this if you do not have one. 
  2. Request evidence of written resolution Where a decision is to be made under the Companies Act by shareholder resolution, all members are entitled to receive a copy of the relevant written resolution, even if, as a minority shareholder, your vote in favour is not required. If you suspect that resolutions have been passed without your sight, you are entitled to request a copy of the written resolutions. 
  3. Obtain company financial documents Shareholders are entitled to be provided, without charge, a copy of the company’s last full accounts and directors’ report so that they can assess themselves the performance of the company. If you have not received a copy of the company’s last accounts, you should request this. 
  4. Put a shareholders’ agreement in place Contractual protection for minority shareholders can be agreed via a shareholders’ agreement to prevent disputes down the line, including providing for protections which are greater than that provided under law. If you don’t have a shareholders’ agreement in place, it may be worth discussing with the directors if one can be put in place to give yourself peace of mind. 

If you feel that your rights as a shareholder are being compromised, we’ve put together a comprehensive guide on shareholder remedies to set out what your shareholder remedies are, when they are available and what you as a shareholder can do to be able to use them. 

We are fully equipped to advise clients as to the terms of their investment, and the contractual rights they will have thereafter, at or before the point of investment. We can also advise minority shareholders after this point to determine what rights they may have. Contact our corporate solicitors on 0800 689 1700 or fill out our enquiry form

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